The message emanating from the last Cabinet meeting before the summer break on Wednesday was clear: as far as the Coalition is concerned the era of “austerity” is over. Everything possible will be done to give something back to the voters in the next two budgets.

Whether the country's economic position justifies this is another matter entirely, but after the mauling they got in the local and European elections there is huge political pressure on Fine Gael and Labour to ease back on tight budgetary policy.

Some senior Labour figures have been talking openly about how the rainbow government narrowly lost being re-elected in 1997 because it stuck to prudent budgetary policies when, in hindsight, it could have been a bit more expansionary.

"We handed over a healthy exchequer to Fianna Fail and the PDs who proceeded to spend with abandon. To make the same mistake again and hand over a healthy economy to Fianna Fáil or Sinn Féin who would inevitably wreck it in the long term would be crazy," said one Labour TD.

Government TDs of both parties are weary of defending cuts. The scale of the reverse in the recent elections has convinced most of them that the public is not prepared to put up with more of the same.

The political pressure is now too strong for the Coalition to resist and the growing evidence of economic recovery certainly gives some room for manoeuvre. With tax revenues rising, and spending under tight control, the borrowing target of 3 per cent of gross domestic product for 2015 looks achievable with an adjustment of considerably less than the €2 billion set out in the bailout terms.

External shock

Comments from Michael Noonan and Brendan Howlin on their way into the Cabinet meeting on Wednesday indicate that it is only a question of how much lower than €2 billion the adjustment should be. A final decision on that will not be made until early October when more economic data is available. But it looks as if the final adjustment could be down to about half that originally planned.

This will please unions and employer bodies who have been united for some time in urging an end to tight budgetary policy. But it will go directly against the advice of the Fiscal Advisory Council which was established with the precise purpose of ensuring that the mistakes of the past are not repeated.

The danger is that some external shock like a trade war between the EU and Russia could throw the recovery into reverse. But barring accidents the political imperative to ease the pressure will prevail.

While the Coalition parties and the social partners may be agreed on the need to avoid an adjustment of €2 billion there will be significant differences on how the freed up resources should be spent. It will take some nimble political footwork to devise a formula acceptable to both parties but a way will be found.

Both Government parties are committed to some form of tax cuts at the earliest opportunity. While Fine Gael places more stress on tax and Labour emphasises the need to ease off on spending cuts there is plenty of common ground on the need to give middle-income earners a tax break.

The difficulty is finding a way to do it that will strike a chord with the public. Back in 1997 Fine Gael and Labour proposed tax reductions through changes in bands and allowances that would most benefit the lower and middle-income groups.

By contrast Fianna Fáil and the PDs advocated crude tax-rate cuts that gave the greatest benefits to the better off. Unfortunately for the Coalition parties much of the electorate was mystified by its proposals and people at all income levels voted for the parties advocating rate cuts.

The obvious lesson is that whatever Noonan comes up with on tax in the next two budgets it will have to be comprehensible to the public if it is to be of any advantage to the Coalition parties.

Regaining the political initiative and setting the agenda for debate in the run-up to the next election is now the imperative for Fine Gael and Labour. Getting the budgets right will determine whether or not they can succeed.

Former Fine Gael strategist Frank Flannery had some pertinent things to say at the MacGill Summer School this week about the way the party lost the plot since the beginning of this year and allowed the Opposition parties to dictate the agenda for the whole election campaign.

Flannery estimated that Fine Gael lost about 4 percentage points of its support from the beginning of the campaign to the end. This stood in stark contrast to the last general election campaign where it gained about 6 percentage points .

Easier budgets One of his key points was that Fine Gael in government tended to do the right thing by the country but forgot about the party, with Ministers being captured by the Civil Service and becoming

detached from the public the longer they remain in office.

Breaking that pattern will not be easy, but the prospect of easier budgets for the next two years could provide an opportunity for re-engaging with the public. Leo Varadkar spoke recently about the need to trust the public by being open and frank about the available options.

If he can make that strategy pay dividends in Health it could point the direction for his colleagues.